Wednesday, March 7, 2012

Rally Running on PSI Fumes?

All of Greece΄s banks are expected to take part in a bond swap program aimed at writing off more than EUR100 billion of the country΄s debt, two senior bank sources to Dow Jones Newswires.

Local lenders hold some EUR40 billion out of a total of EUR206 billion of debt eligible for the bond swap agreement needed to pave the way for Greece΄s second bailout agreement.

A senior bank official said he believes the remainder of the country΄s lenders will follow in the footsteps of Greece΄s top three lenders taking part in the bond swap offer set to conclude Thursday.

"From talks with others, I have the feeling the remainder of lenders will take part in the debt deal," he told Dow Jones Newswires.

On Monday, a body representing Greece΄s private-sector creditors, the Institute of International Finance, named National Bank of Greece SA (NBG), EFG Eurobank Ergasias (EUROB.AT) and Alpha Bank SA (ALPHA.AT) as being among the twelve financial institutions participating in the voluntary exchange.

A second senior bank official confirmed that he too expects the remainder of Greek lenders to participate in the agreement.

The bond swap is an integral part of a second, EUR130 billion bailout loan for Greece that will keep it from becoming the first euro-zone member to default when a EUR14.5 billion bond redemption comes up on March 20.

Majority of Greek pension funds agree to debt deal

The majority of Greece΄s state-chartered social security funds have given an initial nod to taking part in a bond-swap plan needed to clear the way for the country΄s second bailout, but several refused to participate in the debt deal, a government official said.

The boards of seven of Greece΄s pension funds--including two of the country΄s largest--agreed Tuesday to hand over their existing Greek bonds for new ones that will see the principal slashed by 53.5%. A separate state-run fund manager that handles Greek bonds on behalf of other funds also agreed to the debt exchange. Combined, the eight bodies own a total of some EUR2.7 billion of Greek debt.

At the same time, five pension funds, possessing EUR2 billion worth of Greek government paper, have said no to the debt plan in decisions made Tuesday that may not be final, the government official said.

"The funds operate autonomously from the state. I don΄t know whether these are the final decisions," said the official.

Another two social security funds, possessing EUR1.7 billion of bonds, are scheduled to meet Wednesday on whether to participate in the bond offer set to conclude Thursday.

The deal aims to erase as much as EUR107 billion from Greece΄s sovereign-debt burden and bring the country΄s debt ratio down to a more sustainable 120.5% of gross domestic product by 2020, from more than 165% now. It is an integral part of a second, EUR130 billion bailout loan for Greece that will keep it from becoming the first euro-zone member to default when a EUR14.5 billion bond redemption comes up March 20.

A further contribution to the debt deal may come from some EUR15 billion of Greek bonds that pension funds own but are managed by the country΄s central bank. It isn't clear whether these amounts will go toward the debt deal in which Greece is aiming for a 90% participation rate.

Indeed, the WSJ reports that some EUR19 billion worth of Greek government bonds held by the country's state-chartered pension funds will be part of Greece's ambitious debt restructuring plan:

The bonds, which are managed by the central bank, represent the lion's share of the sovereign debt held by those pension funds and come a day after a majority of Greece's dozen-odd funds agreed to participate in the debt swap plan--known as the Private Sector Initiative, or PSI--by trading in some EUR2.7 billion worth of Greek bonds that they hold in their own accounts.

"The bonds held in the common fund [by the Bank of Greece] on behalf of state legal entities and social security funds will participate in the PSI," a Bank of Greece official said.

Under a 1997 law, Greece's pension funds are obliged to deposit any excess cash reserves they have with the Bank of Greece which, in turn, is obliged to invest those reserves in Greek government bonds or treasury bills.

At a late October summit, Europe's leaders demanded Greece proceed with a massive debt restructuring with private sector creditors as a precondition for the country to receive further official support from its European partners and the International Monetary fund.

The debt deal calls on investors to swap their old Greek government bonds with new ones worth less than half their face value and carrying lower interest rates. It aims to erase as much as EUR107 billion from Greece's sovereign-debt burden and bring the country's debt ratio down to a more sustainable 120.5% of gross domestic product by 2020, from more than 165% now.

Will this be enough to push through the 90% participation rate that Greece is aiming for? While Greek Finance Minister Evangelos Venizelos publicly lambasted the smaller Greek pension funds for holding out, Zero Hedge seems to be spurring on PSI holdouts, citing this Reuters article which states a U.S. judge has ordered Argentina to pay interest to a holdout creditor on debt it defaulted on a decade ago.

I've long suspected that Zero Hedge is a site run by a bunch of gold shills and short-selling hedge funds who love stirring up controversial financial news and this is yet another example. They're openly rooting for PSI holdouts so that they can profit off bad news!

More interesting, Ekathimerini reports that independent online news site EU Observer on Wednesday reported that Greece had purchased over 1 billion euros' worth of arms from countries within the European Union at the same time as negotiating its first bailout back in 2010 (guess the military industrial complex is exempt from austerity).

In any case, I bought the dip on a few U.S. coal stocks yesterday morning (like U.S. steel stocks too) and I'm focusing on U.S. data. The ADP numbers came out better than expected this morning, setting the stage for another solid jobs report on Friday. Importantly, investors focusing too much on Europe and Greece will underperform in 2012.

Below, Bloomberg's Mike McKee reports on prospects for a market correction with yesterday's large selloff and the impact of upcoming economic data. He speaks on Bloomberg Television's "Inside Track."

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